Why do all businesses need a merchant account and what is the best way to get one?

Traditionally, in order to have the opportunity to accept credit and debit cards from its customers, any organization (often called a “merchant” by the financial services industry) must be given so-called “proper” status as a bank. This proper status is granted to a merchant through the vehicle of a unique merchant identification (or MID) from the bank and allows them to participate in the payment chain. Pretty much every big company has a merchant account like this. However, the smaller the organization, the less likely you are to have one and you may be missing out on the benefits.

The banks that offer a merchant account are not exactly the same as the ones we are most familiar with as personal checking account holders. All major high street banks have what is known as an “acquiring” banking arm or division. For example, in the UK, NatWest has ‘Streamline’, Lloyds-TSB has ‘Cardnet’, Barclays has ‘Barclays Merchant Services’, HSBC has ‘HSBC Merchant Services’ etc. Also, some organizations outside of the major banks (such as American Express and PayPal, for example) are licensed and do their own procurement. Subject to a variety of preconditions, all of these “acquiring banks” can issue a merchant ID and allow an organization of any kind to begin accepting credit and debit cards. They will authorize or decline each customer transaction, collect payments on the merchant’s behalf, and deposit the money into the merchant’s designated bank account.

Obviously, setting up this merchant account involves costs; Typically, the acquiring bank will include setup charges, monthly or annual fees, monthly rental of a physical terminal (or PDQ machine) for the merchant to process card details, and may insist on a dedicated phone line for the terminal. A merchant will also be charged a percentage of each transaction they process, may be imposed a minimum monthly business volume, and in some cases may be required to provide a substantial “bond” or deposit as additional security (to cover any potential card “chargebacks” that may occur).

Unfortunately, that’s the relatively easy part of the process! – before a merchant can even start the process, they will need to convince the acquiring bank that they are worthy of their trust in the first place, and a merchant will generally need to provide two years’ worth of audited accounts and demonstrate a strong trading history in order for the application appropriate (which is why some banks also require a cash bond and an extensive business plan if a trader can’t satisfy all of that, for whatever reason).

Even if a merchant meets these requirements, they will generally only be able to accept card payments in the “traditional” part of the business. If a merchant wants to set up a website to accept card payments, they will find that acquiring banks will not accept any information from the merchant directly over the Internet. Banks will only accept information from a website that has been processed by an approved payment service provider or PSP (which will do so in bulk and securely, and in accordance with PCI or credit card industry compliance standards). payment) .

The role of a payment service provider is to integrate a merchant’s e-commerce enabled website with major credit card networks so that orders generated by a merchant’s own or chosen ‘shopping cart’ software can Authorize and collect payment. This payment is then transferred to a merchant account for onward delivery to another receiving bank account as needed.

As you might expect, all merchants have to go through a fairly formal application process to get a deal with a PSP. Their terms and conditions and charges vary greatly from PSP to PSP and it is very difficult to make exact comparisons. Merchants should also be aware that any charges made by any PSP will always be in addition to the charges that are leveraged by the acquiring bank providing the merchant account. This means that any merchant can end up paying two lots of setup charges, monthly/annual fees, and worst of all, two lots of percentages (plus flat fees in some cases) on each transaction.

So, you might be thinking, with all these obstacles:

1. Why would any particular small organization bother with all of this? and
2. Are there better ways to go through the steps required to sign up for the merchant account if it is deemed worth the trip to do so?

The answer to the first question is relatively simple. For most businesses that turn over, say, £100,000+ a year, the ability to offer credit and debit card payments will not only generate additional revenue, but also speed up cash flow (at least up to certain point). This will usually easily recoup the outlay made when setting up a merchant account and lead to incremental profits on the deal. Payback of the fixed fee is expected to occur within the first 6-9 months, and thereafter the benefits are typically significant for most businesses.

The answer to the second question is also positive. As the Internet (and web 2.0 technology in particular) has evolved in recent years, there are now several companies that a merchant can approach to be a “one stop shop” when it comes to accepting payments (credit, debit and even others). types). In other words, these companies will take care of all your business needs, including establishing the necessary relationship with both the bank (the acquirer) and the processor (the PSP), and may also offer other services. At a simple level, this is likely to be more flexible customer service (a single point of contact with a real person, for example), but may include other services (such as e-wallet capability, such as PayPal offers, for example). example, or electronic invoicing capability). like PaySwyft offers for example). Additionally, these “one-stop-shop” businesses can often reduce overhead costs and reduce administrative hassles, as well as operate on a “pay as you go” basis. This means that even small merchants can quickly and cost-effectively accept credit and debit cards and start reaping the benefits that were only primarily available to larger organizations in the past.